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Color of Money: Contribute as much as you can to your 401(k) -- just in case

Michelle Singletary
on Oct 25, 2017

WASHINGTON -- Several days before President Trump's tweet telling folks they didn't have to worry about changes to their 401(k)s, the IRS made an announcement that didn't get nearly as much attention: Starting next year, you can contribute more pre-tax dollars to your employer-sponsored plan.

But you also might not have realized that tax-reform talks on Capitol Hill recently included discussions about turning the 401(k) and its cousins into Roth IRAs, which are funded with after-tax earnings.

Roth-like workplace accounts would bring in more revenue to the government now, instead of later, and so would help offset proposed Republican tax cuts for businesses. Meanwhile, Republicans were reportedly also considering lowering the maximum pre-tax amount individuals and married couples could contribute to their 401(k)s to possibly as low as $2,400 a year. This year's limit is $18,000.

Trump saw the possible backlash and bailed on the proposals to tinker with the retirement plans. On Monday, he tweeted: "There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"

But just because Trump tweets it doesn't make it so. There still could be changes to the tax status of these types of accounts.

However, for now, the IRS says cost-of-living adjustments are boosting the maximum amounts you can contribute next year to 401(k), 403(b) and most 457 plans as well as the federal government's Thrift Savings Plan (TSP). The cap will increase from $18,000 to $18,500.

The income cutoffs that determine who can contribute to traditional individual retirement accounts (IRAs) and Roth IRAs will also increase next year. If you or your spouse are covered by a retirement plan at work, your IRA deduction may be reduced or phased out depending on your filing status and income. Here are some of the changes for 2018, as laid out by the IRS. If you are:

-- single and covered by a workplace retirement plan, the income phase-out range will be $63,000 to $73,000, up from $62,000 to $72,000.

-- a married couple filing jointly, where a spouse making an IRA contribution is covered by a workplace retirement plan, the range is $101,000 to $121,000, up from $99,000 to $119,000.

When it comes to a Roth, the income phase-out range will be $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. If you're married and file jointly, the phase-out range runs from $189,000 to $199,000, up from $186,000 to $196,000.

Still unchanged at $5,500 is the annual limit for IRA and Roth contributions. The catchup provision for people 50 or older stays the same at $1,000. There is also a catchup contribution limit for employees 50 and over who participate in a 401(k) or other workplace retirement plan. That too won't increase and remains at $6,000.

With all the concern about people having enough money to retire, why would anyone in Congress consider the tax-deferred vehicles fair game? They're the best way to encourage people to save.

And it's not like the accounts have become a tax haven for the uber-wealthy. In the second quarter of this year, the average 401(k) balance hit a high of $97,700, and the average IRA balance was $100,200, according to Fidelity Investments. The average TSP account balance for employees under the Federal Employees Retirement System (FERS) is $133,609.

Sure, some people -- after two or three decades of saving faithfully every paycheck -- have amassed a great deal of money in workplace plans. In the TSP, 16,475 participants have crossed the $1 million mark, according to a spokesperson for the Federal Retirement Thrift Investment Board.

Mike Causey of Federal News Radio writes often about the TSP "millionaire's club." "Aside from a few wealthy political appointees from the current and past administrations, the vast majority of people with million-dollar [TSP] accounts were individuals with careers averaging 28 years, who invested in the C and S stock indexed funds through good times and bad, and who did not panic and retreat to the 'safety' of the treasury securities G fund during the Great Recession," Causey wrote in a recent column.

If you're in this club, send me an email to colorofmoney@washpost.com. I'd like to share how you reached the millionaire milestone.

Whatever happens with workplace retirement accounts, you're still likely to hear that you should "max out." This advice seems all the more critical given recent events.

There have been some sacred-cow tax breaks that no one thought Congress would dare touch. The mortgage-interest deduction is one. Another was employer-sponsored retirement plans.

It's a new day in politics, and anything can happen. So my advice is: Contribute as much as you can now -- while you can.

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Readers can write to Michelle Singletary c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071. Her email address is michelle.singletary@washpost.com. Follow her on Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary). Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

(c) 2017, Washington Post Writers Group

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